problem set answers 8

problem set answers 8 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 1 of 8 A NSWERS FOR P ROBLEM S ET 7 Chapter 8 LEARNING OBJECTIVE LEARNING OBJECTIVE 8.1: Discuss the role of international trade in the U.S. economy. Review Questions 1.1 Although the United States is the world’s leading exporter, Figure 8-3 shows that exports and imports as a share of total output (GDP) are smaller for the United States than for most other industrialized countries. Because the United States has a large and diverse economy, the gains from trading with other economies probably aren’t as great as they would be if the United States were smaller and less diversified, such as Belgium or South Korea. Problems and Applications 1.2 Agriculture would see a large decline, as would certain manufacturing industries, such as computers and software. Many service industries, such as hair cuts and medical services, would not be much affected because the United States does not export services of these types. 1.3 Disagree. As Figure 8-3 shows, Japan is the only high-income country that is less dependent on international trade than is the United States in terms of share of GDP that is exported. 1.4 In the short term, such legislation may help Boeing, as they will increase their sales to U.S. firms. But such legislation may encourage foreign governments to retaliate by banning imports of Boeing aircraft. Because Boeing relies heavily on exports, such retaliation could have a devastating effect on the firm. In addition, in the long run, firms that are protected from foreign competition by government action often become inefficient because workers and managers are no longer under pressure to achieve high levels of productivity. LEARNING OBJECTIVE LEARNING OBJECTIVE 8.2: Understand the difference between comparative advantage and absolute advantage in international trade. Review Questions 2.1 Comparative advantage is the ability of an individual, business, or country to produce a good or service at the lowest opportunity cost. It is powerful because it runs counter to most people’s intuition that trade is based on absolute advantage. Applying the principle of comparative advantage allows us to analyze which products countries tend to export and which they tend to import. It also allows us to see the immense gains – to rich and poor alike – that can be generated from trading. 2.2 Absolute advantage is the ability to produce more of a good or service than competitors using the same amount of resources. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than other producers. A country will often import goods in which it has an absolute advantage. For example, the United States could produce textiles—such as sheets and towels—with fewer resources than can China, but China can produce these goods at a lower opportunity cost than the United
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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach
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This note was uploaded on 02/11/2010 for the course ECON 101 taught by Professor Steimetz during the Fall '08 term at CSU Long Beach.

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problem set answers 8 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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